Sun
You might want to think twice before you slap down $750 for a bottle of the exquisite Krug Clos du Mesnil champagne (1995) to ring in the new year. There might not be much to celebrate.
The forecasters are nearly unanimous: The Canadian economy will not grow as quickly in 2007 as it did in 2006 or in 2005 and the slowdown might make it difficult for Ottawa to deliver on promises of tax relief.
The writing has been on the wall through most of 2006, most dramatically so in September when the Gross Domestic Product actually declined by 0.3 per cent, dragging growth in the third quarter to an annualized rate of 1.7 per cent, the slowest pace in three years. That’s down from 3.8 per cent in the first quarter and two per cent in the second.
The slowing pace was inevitable as the drivers of economic growth shifted into low gear. For example, gross fixed investment — one of the prerequisites for long-term economic expansion — grew by 8.0 per cent in 2004, 7.1 per cent in 2005 and 6.3 per cent in 2006, but is expected to grow by only 3.4 per cent in 2007, according to the Organization for Economic Cooperation and Development.
In its semiannual economic outlook, the OECD forecast growth of Canadian GDP of 2.7 per cent in 2007, down from an estimated 3.1 per cent in 2006, largely as a result of the cooling economy in the United States and an accompanying decline in energy and other commodity prices. (For the record, the Bank of Canada forecasts GDP growth of 2.5 per cent in 2007 while the finance ministry agrees with the OECD figure.)
Whatever numbers you choose to believe, the softening of the Canadian economy is clearly becoming more pronounced. The Toronto Dominion Bank expects four quarters of what it calls “below trend” growth. However, the good news is that, while most anticipate weakness, none expects a recession.
The Conference Board of Canada sees a healthy economic future for British Columbia as a preferred retirement haven for baby boomers and looks for average annual GDP growth of 2.3 per cent over the long term.
Meanwhile, mining and construction should keep the province humming in the short term, although not at the frenetic pace of the last few years. The Bank of Montreal expects B.C. will grow at 3.4 per cent a year in the 2008 to 2010 period, a faster clip than any province besides Alberta.
The TD Bank predicts the slowdown of the Canadian economy will be short lived as the U.S. economy recovers through 2007 and the Bank of Canada provides some monetary stimulus in the second half of the year to move things along. A rate cut from the current 4.25 per cent might not only loosen credit but knock a few points from our near-90-cent US dollar to boost exports. Indeed, the Royal Bank of Canada attributes the strong dollar to high energy prices and predicts it will drop to 80.6 cents US by year-end 2007 as commodity prices slip below historic highs.
Housing remains the dark cloud over what would otherwise likely be a benign economic pause. The Royal Bank of Canada noted that in the U.S. sales of existing and new homes were 13 per cent and 20 per cent lower respectively from the peak of recent months and that the correction is likely to continue through 2007. Home sales in Canada have weakened as well, though not as sharply, and the real estate industry is watching anxiously for more fallout. Canada Housing and Mortgage Corp. has forecast a six-per-cent increase in the average resale house price but prices could just as easily drop that much in an overheated market like Vancouver.
Against this economic backdrop, a New Year’s toast with Henkel Trocken (about $22.50) rather than the pricier bubbly might be in keeping with the more austere 2007 economists anticipate.
© The Vancouver Sun 2006